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Dynamic Incentives and Markov Perfection: Putting the 'Conditional' in Conditional Cooperation

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  • Emanuel Vespa
  • Alistair J. Wilson

Abstract

This paper experimentally examines the selection of equilibria in dynamic games. Our baseline treatment is a two-state extension of an indefinitely repeated prisoner’s dilemma, which we modify in series of treatments to study the focality of efficiency and symmetry, the effect dynamic and static strategic externalities, and the size of the state-space. Subjects in our experiments show an affinity for conditional cooperation, readily conditioning their behavior on both the state of the world, and recent history of play. With strong dynamic and static externalities present we see most subjects coordinate on efficiency by conditioning on past play. However, when we remove either type of strategic externality, conditioning on just the state becomes more common, and behavior is consistent with the Markov-perfect prediction. Changes to the environment’s state-space are more nuanced: perturbations of the game with small-sized noise does not lead to more state-conditioned behavior; however, a richer set of endogenous states does lead to more Markov-perfect behavior.

Suggested Citation

  • Emanuel Vespa & Alistair J. Wilson, 2015. "Dynamic Incentives and Markov Perfection: Putting the 'Conditional' in Conditional Cooperation," CESifo Working Paper Series 5413, CESifo.
    • Handle: RePEc:ces:ceswps:_5413
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    References listed on IDEAS

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    Cited by:

    1. John Duffy & Dietmar Fehr, 2018. "Equilibrium selection in similar repeated games: experimental evidence on the role of precedents," Experimental Economics, Springer;Economic Science Association, vol. 21(3), pages 573-600, September.
    2. Masaki Aoyagi & V. Bhaskar & Guillaume R. Fréchette, 2019. "The Impact of Monitoring in Infinitely Repeated Games: Perfect, Public, and Private," American Economic Journal: Microeconomics, American Economic Association, vol. 11(1), pages 1-43, February.
    3. Calzolari, Giacomo & Casari, Marco & Ghidoni, Riccardo, 2018. "Carbon is forever: A climate change experiment on cooperation," Journal of Environmental Economics and Management, Elsevier, vol. 92(C), pages 169-184.

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    More about this item

    Keywords

    dynamic cooperation; equilibrium selection; history dependence;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General

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